Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Display:
Eurozone Inflation - NYTimes.com

Wolfgang Munchau agonizes over European inflation targets; he worries that rising German inflation may lead the ECB to raise rates, which would be disastrous for troubled peripheral economies.

I wrote about this a couple of weeks ago. Trying to keep German inflation low means imposing harsh deflation on the European periphery, as it tries to get costs and prices back in line.



Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Jan 31st, 2011 at 08:59:24 AM EST
EuroIntelligence: EU started work on Brady plan for Greece
Wolfgang Münchau on inflation

In his FT column, Wolfgang Münchau asks the question whether German is overheating, and its implications on ECB policy, and eurozone stability. He says the monoculture of Germany's economy, combined with low unemployment at the start of the economic cycle have already led to severe labour shortages, putting pressure on wages. He expects big wage rise this year, which will start to affects average labour costs next year. Combined with rising energy prices, a significant build-up of inflationary pressures is likely. The ECB will probably decide to increase interest rates relatively soon. Delaying the rate increase would trigger corrective action later, with interest rates rising to the high single digits, and jeopardise the recovery of the banking sectors in Spain, and even Germany. His conclusion that an inflation target of less than 2 per cent is too tough for a monetary union like the eurozone.



Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 09:18:24 AM EST
[ Parent ]
European Tribune: Get your economic analysis eight months early.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 31st, 2011 at 09:43:05 AM EST
[ Parent ]
... for the better part of half a year at that point.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 31st, 2011 at 09:43:48 AM EST
[ Parent ]
ET: preaching in the desert.

ET: the Cassandra complex.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 09:51:33 AM EST
[ Parent ]
So the ECB is supposed to raise rates because wages in Germany are no longer stagnant?

That's pure politics. Especially considering the politics of increasing energy costs, and the entirely political reality of speculation-driven commodity price increases.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jan 31st, 2011 at 09:57:25 AM EST
[ Parent ]
What do you mean? That Economics is Politics? Nooooo!!!

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 10:02:23 AM EST
[ Parent ]
Maybe we should just start using the old name for economics again: political economy.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Feb 1st, 2011 at 08:14:30 AM EST
[ Parent ]
ThatBritGuy:
So the ECB is supposed to raise rates because wages in Germany are no longer stagnant?
Well, if you replace ECB with Bundesbank it begins to make sense...

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 10:07:50 AM EST
[ Parent ]
Well, if you replace ECB with Bundesbank Wall St it begins to make sense...

FIFY

NeoLib 101 - there is no such thing as a good wage increase.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jan 31st, 2011 at 10:44:26 AM EST
[ Parent ]
Stop blaming Wall St, this is a fully homegrown European insanity.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 10:48:16 AM EST
[ Parent ]
Did the ECB write the neoliberal rule book, or did it import it?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jan 31st, 2011 at 10:55:36 AM EST
[ Parent ]
I think they're faithfully implementing the original Austrian version.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 11:06:58 AM EST
[ Parent ]
I hope not.

From the usual source:

The Austrian praxeological method is based on the heavy use of logical deduction from what they assert to be undeniable, self-evident axioms or irrefutable facts about human existence. The primary axiom from which Austrian economists deduce further certain conclusions is the action axiom, which holds that humans take conscious action toward chosen goals.[43] Austrian economists focus on goal-directed action and say that it is undeniable because in order to deny action, one would have to employ action in the act of denial.

Methodology is the one area where Austrian economists differ most significantly from other schools of economic thought. Mainstream schools such as the neoclassical economists, the Chicago school of economics, the Keynesians and New Keynesians, adopt "empirical" mathematical and statistical methods, and focus on induction to construct and test theories--while Austrian economists reject this approach in favor of deduction and logically deduced inferences. According to Austrian economists, deduction is preferred, since if performed correctly, it leads to certain conclusions and inferences that must be true if the underlying assumptions are accurate. However Austrian economist Robert Murphy has stated that those using Austrian theories can still err in their interpretations of history, even if based on a theory formulated by deduction.[44] Caplan makes a similar point about quantitative significance, explaining that a theory, such as one which logically relates minimum wage and unemployment, tells nothing of the approximate quantity of change in unemployment one can expect upon minimum wage increases.

Austrian economists hold that induction does not assure certainty like deduction, as real world economic data are inherently ambiguous and subject to a multitude of influences which cannot be separated or quantified, one cause or correlation from another. Austrians therefore claim that mainstream economics has no way of verifying cause and effect in real work economic events, since economic data which can be correlated to multiple potential chains of causation.[45] Mainstream economists counter that conclusions that can be reached by pure logical deduction are limited and weak.[46]

Critics of the Austrian school contend that by rejecting mathematics and econometrics, it has failed to contribute significantly to modern economics. Additionally, they contend that its methods currently consist of post-hoc analysis and do not generate testable implications; therefore, they fail the test of falsifiability as prescribed by the scientific method.[10][47] Austrian economists counter that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions.

So are they assuming inflation is an inevitable outcome of conscious economic choice? I.e. thinking causes inflation?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Jan 31st, 2011 at 01:43:01 PM EST
[ Parent ]
the "Austrian theory" of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.

- Krugman

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Feb 1st, 2011 at 08:21:21 AM EST
[ Parent ]
Slate Magazine: The Hangover Theory by Paul Krugman on December 4, 1998
A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking--not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.

...

The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity--of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes--investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.

Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston's real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don't say that it's obvious--although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought--a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles--was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.



Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Feb 1st, 2011 at 08:52:53 AM EST
[ Parent ]
I realised this morning that my political energy was being used not to scream incoherently like a crazy person every time I was exposed to anything said by a politician about the economy.
by Colman (colman at eurotrib.com) on Mon Jan 31st, 2011 at 10:24:09 AM EST
[ Parent ]
Migeru:
the monoculture of Germany's economy, combined with low unemployment at the start of the economic cycle have already led to severe labour shortages, putting pressure on wages. He expects big wage rise this year, which will start to affects average labour costs next year
I'm sure the timing of this is just a coincidence: Thousands of highly-qualified Spanish jobseekers hoping to emigrate to northern Europe
ARCHITECTS, engineers and other specialist technically-qualified young people from Spain have been clogging up websites offering jobs in Germany with applications ever since chancellor Angela Merkel announced that the country was seeking unemployed Spaniards.

With Spain's unemployment rate at 20.33 per cent - rising to 40 per cent among the under-35s - Merkel is now actively seeking highly-qualified jobseekers from Spain to mop up the deficit in professionals in Germany's employment market.

She intended to make this public at the Spanish-German summit meeting in Madrid on February 3, but already, thousands of jobseekers from Spain are making plans to emigrate north.

So, Spanish qualified workers migrate to Germany, depressing labour costs there and relieving the pressure to reduce labour costs in Spain, which is precisely the wrong kind of macroeconomic feedback you need to set up between Spain and Germany.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 10:12:11 AM EST
[ Parent ]
Just this weekend in Eurointelligence: Those second round effects - again
They are talking about inflation again. Yesterday Germany published some preliminary data for January inflation, showing a relatively moderate rise of 2%, but the rise of inflation in Belgium to 3.2% is quite spooky. Core eurozone inflation remains subdued, but is edging up above its long-run average. Two ECB board members, Lorenzo Bini Smaghi and Manuel  Gonzales Paramo went out yesterday to warn about the second round effects of commodity price hikes. Bini-Smaghi said a permanent and repeated rise in import prices would affect domestic inflation. The ECB is very obviously embarking on a verbal campaign to warn financial markets and wagesetters  that it will not tolerate a rise in inflation. Euro zone interest rate futures fell  yesterday, according to Reuters, and the yield on two-year German debt hit a 15-month high at 1.387%.
They've been complaining about talk of "second round effects" for the whole month of January, since it first became known that EU inflation had exceeded 2%...

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 31st, 2011 at 09:59:12 AM EST
[ Parent ]

Display:

Occasional Series